Magna CEO in a shopping mood in post-Stronach era

Frank Stronach, who stepped down as chairman in 2011, had shied away from debt in the cyclical auto parts industry.

Photo credit: BLOOMBERG

Mark ClothierAugust 19, 2014 - 6:54 am ET

TORONTO (Bloomberg) -- Magna International Inc., the largest auto supplier in North America, will consider purchases of as much as $4 billion as it distances itself from debt-averse founder Frank Stronach.

Magna, which hasn’t done an acquisition of more than $500 million in a decade, is more willing to take on debt to finance transformative acquisitions than it was when Stronach was still involved with the company, CEO Don Walker said in an interview in Bloomberg’s Toronto offices.

The number of auto suppliers will shrink as car companies push for vendors who can supply fewer global platforms, he said. While Magna would use cash for a small acquisition, it could also take on debt or issue equity if the target was “huge,” Walker said.

“We have complete flexibility,” he said. “We have good discussions at the board.”

The 2008-09 downturn would have been a good time to do deals but the company didn’t want to use its cash and with the shares trading so low, a share-backed purchase would have been dilutive.

“We’re not in that situation anymore,” Walker said.

Johnson Controls, Lear

Stronach, who stepped down as chairman in 2011 as the company switched to a single share-class structure, had shied away from debt in the cyclical auto parts industry. Stronach declined to comment, spokeswoman Michelle Abbott said in an email.

Magna’s largest acquisition since 1990 was the $603 million privatization of its public subsidiary Concord, Ontario-based Tesma International Inc. in 2004, according to data compiled by Bloomberg.

The combined value of all of Magna’s acquisitions since 1990 where the terms were disclosed is just $3.3 billion, the data shows. What Magna might be interested in acquiring is another question.

The seating business of Milwaukee-based Johnson Controls Inc. or a complete takeout of suburban Detroit-based Lear Corp. would be the mostly likely targets if Magna was looking to bolster its seating business, Colin Langan, a New York-based analyst at UBS AG’s UBS Securities unit said in an interview.

China growth

Both acquisitions would be worth several billion dollars, Langan said. They would meet Walker’s goals though of bolstering businesses Magna is not yet a market leader in and expanding geographically, he added. “They’re number four in seating and acquiring either one would make them No. 1,” he said.

Johnson Controls has been putting less emphasis on its automotive business as it moves to a more multi-industrial model, Langan said. Selling the seating business is something they could consider as a result, Langan said.

Lear, with a $7.9 billion market capitalization, would require an entire takeout because they’re not likely to leave themselves as just a wiring company, he added. Both assets would achieve another one of Walker’s goals though by giving Magna a larger foothold in China, Langan said.

“If you look at both Lear and JCI, they both have pretty good positions in China with their joint ventures,” he said. “It would in some ways help them broaden their footprint and give them more on-the-ground experience there.”

Integration challenges

In the past, Magna has had difficulties integrating some of its larger acquisitions, like suburban Detroit-based New Venture Gear Inc., which it acquired in 2004 for about $440 million, said David Tyerman, a Toronto-based analyst at Canaccord Genuity.

The company is very decentralized and relies heavily on plant managers to act as though they’re independent businesses, incentivized by the profits of the plant, Tyerman said. Magna ran into issues integrating New Venture, which was a highly unionized workforce, into its culture, Tyerman said.

“It does have to be the right deal,” he said. “If they went out and simply bought something and it was too expensive, all this hard earned credibility that they’ve gotten from a corporate governance standpoint would be thrown out the window,” he said.

The U.S. auto market, where Magna gets 24 percent of its revenue, is rebounding from the recession and is headed for its best year since 2006, buoyed by consumer confidence, payroll gains, low interest rates and pent-up demand for new vehicles.

U.S. light-vehicle sales rose 9 percent in July to 1.44 million for an annualized rate, adjusted for seasonal trends, of 16.5 million, according to Autodata Corp. It was the fifth straight month of at least a 16-million pace, the Woodcliff Hills, New Jersey-based researcher said.

Sales leader

Magna has rebounded better than its peers. Sales have grown at a compounded annual growth rate of 8 percent the past five years, compared with an average of 3.4 percent for North American auto suppliers, Bloomberg data show.

Profit has been less stellar. Magna’s earnings before interest, taxes, depreciation and amortization, measured as a percentage of sales, is 8.8 percent, compared with a peer- average of 10 percent, Bloomberg data show.

Whether an acquisition is transformational wouldn’t necessarily be determined by its size, but by what it adds, Walker said.

’’If we did something that really made us a world leader in four or five different product categories we’re not today, something in the eyes of the customer that would say, ‘Boy, we really want to give them business now because they’re so good,’’’ that would be transformational, he said.